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How is crypto currency such as Bitcoin taxed in South Africa?

on Friday, 01 December 2017.

How is crypto currency such as Bitcoin taxed in South Africa?

 

 

Please note that the information below is an opinion and cannot be used to rely on as formal tax advice. In order to  obtain formal tax advice regarding your tax situation, please contact us directly for a consultation.

For the lazy reader I start with a summary:

  1. It is my opinion that Bitcoin will be classified as an asset for tax purposes in the current ambit of the income tax act.
  2. It is my opinion that the gains made on the sale of Bitcoin will be taxed as trading income (except in the unlikely case where it was held as a long term investment where it will be taxed as capital gains).
  3. See the example at the end of the article.

 

The View of SARS

 

SARS has not given their interpretation for the specific tax treatment of cryptocurrency yet. There is a common misconception that this means that no tax has to be paid on cryptocurrency gains. This is not the case, as the income tax act does make provision for gains on cryptocurrency albeit not directly. According to an article published by IOL, in Personal Finance, SARS has made their current position clear “Transactions or speculation in Bitcoin is subject to the general principles of South African tax law and taxed accordingly” (https://www.iol.co.za/personal-finance/youre-liable-for-tax-on-bitcoin-gains-11508366).

For the rest of this article I will refer to Bitcoin as an example, since this is a well known cryptocurrency. Where I use the term Bitcoin I also refer to other forms of cryptocurrency unless explicitly indicated otherwise.

 

The nature of Bitcoin - Currency vs Asset

 

In order to assess how Bitcoin fits into the South African Income tax act a first consideration should be to assess the nature of Bitcoin. 

Bitcoin cannot be classified as a currency since it is not related to a specific country. Section 24I of the income tax act defines local currency as “currency of the Republic” and foreign currency as: “any currency which is not local currency”. It is thus clear that Bitcoin is not local or foreign currency and therefore not currency.

The next logical consideration would be to assess Bitcoin as an asset (similar to for example shares). 

Paragraph one of the the eight schedule of the income tax act defines an asset as:

“property of whatever nature, whether movable or immovable, corporeal or incorporeal, excluding any currency, but including any coin made mainly from gold or platinum and a right or interest of whatever nature to or in such property”

Section 1 of the income tax act defines trading stock as:

“anything produced, manufactured, constructed, assembled, purchased or in any other manner acquired by a taxpayer for the purposes of manufacture, sale or exchange by the taxpayer or on behalf of the taxpayer “

Trading stock is also classified as an asset. 

It is therefore in my opinion clear that Bitcoin will be classified as an asset for tax purposes in the current ambit of the income tax act and in the majority of the cases as trading stock when it is traded in a speculative manner.

 

Capital gain vs trading income

 

The next question that arises is whether the Bitcoin (asset) will be taxed as a capital gain or as normal trading income when you sell the Bitcoin.

The income tax act is clear on this area as it is well established.

If an asset is held as a long term investment it will be taxed as a capital gain and if the asset is for short term trading (speculative) purposes it will be regarded as trading income.

It can be complex exercise to determine the intention of a taxpayer as to whether the asset was purchased as a long term investment or for trading purposes.  This article will not focus on the complexities of determining the long term or trading nature of the asset. In the current Bitcoin environment I am of the opinion that most of the parties buying and selling Bitcoin is doing this for trading purposes. As soon as you buy low and sell high or even only sell high you are providing an indication that you do not have a set investment period.

 

Conclusion

 

It is therefore in my opinion clear that the gains made on the sale of Bitcoin will be taxed as trading income (except in the unlikely case where it was held as a long term investment where it will be taxed as capital gains).

In simple terms, the amount you sell the Bitcoin for, less the amount you paid for the Bitcoin will be added to your normal taxable income.

 

Example

 

An illustration by example:

Example:

Mr Nakamoto works as an plumber and earns R500 000 salary per year. In addition to this Mr Nakamoto buy and sell Bitcoin. 

In the relevant year Mr Nakamoto did the following Bitcoin trades:

  1. Bought Bitcoin for R100 000 and sold this in the same year for R150 000
  2. Bought Bitcoin for R60 000 and sold this in the same year for R170 000

Thus the total gain Mr Nakamoto made is R50 000 (R150 000 - R100 000) + R110 000 (R170 000 - R60 000) = R160 000.

The R160 000 should be added to his salary of R500 000. Thus his taxable income will be R660 000 (R500 000 + R160 000).

Please note that exchange gains can also play a role, but will not be discussed in this article.

Author: Chris Herbst, CH Consulting

Comments (33)

  • Juls

    21 December 2017 at 11:57 |
    If you buy in USD and sell in ZAR via the use of different platforms, can this be subject to import tax? Or is it still based as income tax?

    reply

    • Chris Herbst

      21 December 2017 at 12:05 |
      Hi Juls,
      In my opinion it will not be subject to import tax, only to income tax.

      We will need to wait and see whether any specific regulation is released in this regard in the future.

      reply

  • Jeff

    28 December 2017 at 17:57 |
    Where can I find a tax practitioner that can assist me with declaring profits from my Cryptocurrencies?

    reply

    • Chris Herbst

      28 December 2017 at 19:16 |
      Hi Jeff,

      We can assist you with declaring your cryptocurrency gains.

      You are welcome to email me directly at chris@chconsulting.co.za then we can take it from there.

      reply

  • Claudio

    03 January 2018 at 17:26 |
    Just wondering. If i just exchange btc to zar on luno for example and send them to my bank account.Then at the end of the year i declare all and pay my income tax based on the current tax table will that be ok?

    reply

    • Chris Herbst

      04 January 2018 at 12:46 |
      Hi Claudio,
      Your understanding is correct, aside from the following:
      since you are trading with bitcoin you will need to declare your gains and pay the tax as a provisional taxpayer. I.e. at the end of August and end of February of each year you will file a provisional tax return and pay the required taxes on that.

      Should you want to read more about provisional tax, see our blog entry here:
      https://www.chconsulting.co.za/blog/item/who-should-register-for-provisional-tax

      Does this solve your query?

      reply

      • claudio

        04 January 2018 at 12:57 |
        Thanks Chris for getting back to me.

        I am not really a trader, what i do is buy alternative coins and hold them long term, then when im happy with my gain i sell them and convert that to btc and send to my bank account, i really dont wanna get into provisional tax. I can hold coins for years before i sell them.

        reply

  • claudio

    04 January 2018 at 13:01 |
    And not always its a gain, sometimes it results in loss

    reply

    • Chris Herbst

      04 January 2018 at 13:21 |
      Pleasure. Trading gain / loss vs capital gain / loss depends on among other factors intention when buying and intention when selling. This needs to be investigated on a per case basis.

      If indeed your gains / losses are of capital nature you can declare this annually in your income tax return. As mentioned if trading income you will be a provisional tax payer.

      reply

  • Crypto

    04 January 2018 at 20:44 |
    Hi, what is the tax implication if you are simply trading between bitcoin and the other crypto currencies on an exchange and not converting them to ZAR? Does each of these trades need to be individually considered for their gains and losses and taxes paid accordingly, or only when the gains are converted to ZAR? Thanks

    reply

    • Chris Herbst

      05 January 2018 at 10:01 |
      Hi Crypto,
      The gain / loss for tax purposes is triggered when you realise the gain / loss. I.e when you convert the relevant cryptocurrency to ZAR (or another currency) OR when you move from lets say Bitcoin to Ethereum.

      You will be liable for provisional tax on these trades and therefore you will pay tax on your aggregate gains every six months. You can view our provisional tax blog if you would like to learn more about provisional tax https://www.chconsulting.co.za/blog/item/who-should-register-for-provisional-tax.

      reply

  • James

    06 January 2018 at 18:01 |
    Hi Chris , I have been mining cryptocurrency for over a year (Ethereum). All of my Ether i have attained has been through mining and not purchased. How would it work if i were to withdraw this into Rands? Add it to my income tax? Thanks

    reply

    • Chris Herbst

      08 January 2018 at 17:36 |
      Hi James,
      In my opinion the cryptocurrency you receive when you mine will be handled as remuneration.

      I.e. when you receive the cryptocurrency for your mining you will calculate the value in terms of your tax reporting currency and that will be the trading income / remuneration earned for your mining. This trading income will be added to your taxable income.

      Since you do not actually convert the cryptocurrency, the currency can off course grow / decrease in value, which has another tax implication. In the case where you do not speculate with the said cryptocurrency it will be taxed as a capital gain / loss. The base cost for the capital gain will be the value you "converted" it to on the day you received it as trading income / remuneration. This capital gain / loss will be added to your taxable income.

      Same logic as above will follow if you speculate with the said cryptocurrency except it will be taxed as trading income / loss and not a capital gain. This trading income / loss will be added to your taxable income.

      Let me know if this is not clear, then I will post an example with values.

      reply

  • James

    09 January 2018 at 11:16 |
    Thanks so much for the response Chris. Very interesting! If you could post some figures that would be great. :) Thanks

    reply

    • Chris Herbst

      10 January 2018 at 16:18 |
      Pleasure.

      Okay, here is an example with values.

      Let's say on 31 Jan 2018 you received 10 cryptocurrency units of value R100 each (the value on 31 Jan 2018 - although you are not converting to ZAR).

      Thus your remuneration is 10 x R100 = R1 000.

      You will add this R1 000 to your other taxable income as remuneration / trading income and declare this in the provisional tax return due 28 Feb 2018.

      Since you kept the cryptocurrency it can now increase or decrease in value. Let's say it increased in value and is worth R200 per unit on 31 May 2018.

      You are of decide to now convert it to ZAR. Thus you receive 10 x R200 = R2 000 for your 10 units of cryptocurrency.

      The question now is whether this is trading income or capital income. This is where intention plays a role - i.e. whether your intention on acquisition (when you were awarded these units) was to hold it long term or to sell when the value is high enough.

      If capital of nature:
      The base cost would be the 10 x R100 = R1 000 you received on 31 Jan 2018. The selling amount would be the value on date of disposal, that is on 31 May 2018, 10 x R200 = R2 000.

      Thus your gain is R2 000 - R1 000 = R1 000.

      You will include 40% (2018 inclusion rate) of the capital gain to your taxable income (ignoring annual exclusion). Thus 40% * R1 000 = R400

      If trading income (not capital of nature):
      The full R1 000 gain will be included in your taxable income.

      You will declare this taxable income in your 31 August 2018 provisional tax return.

      Please note that this is a simplified example and other factors may play a role.

      Hope this helps.

      reply

  • pieter

    10 January 2018 at 12:56 |
    Hi,

    What is you bought 1 btc last year for 40,000 and then at a later stage cashed out the 40,000 back to your bank account.

    So basically your ZAR profit is zero, buy you have a amount of btc left which you intend to store for a long term?

    reply

    • Chris Herbst

      10 January 2018 at 16:24 |
      Hi Pieter,
      If you bought 1 bitcoin for 40 000 and cashed out 40 000 and there was an increase in the bitcoin value, you actually cashed out a fraction of that 1 bitcoin.

      Let's say the bitcoin value increased to 80 000 per bitcoin. If you cashed out 40 000 you cashed out 0.5 bitcoin.

      To calculate the tax:

      If trading income:
      The value of the 0.5 bitcoin when you bought it was 0.5 x 40 000 = 20 000, you sold it for 40 000, thus your gain is 40 000 - 20 000 = 20 000. Thus 20 000 will be included in your taxable income.

      If capital of nature:
      The value of the 0.5 bitcoin when you bought it was 0.5 x 40 000 = 20 000, you sold it for 40 000, thus your capital gain is 40 000 - 20 000 = 20 000. Thus 20 000 x 40% (2018 inclusion rate) = 8 000 will be included in your taxable income (ignoring annual exclusion).

      reply

      • pieter

        12 January 2018 at 13:51 |
        Thank you makes sense.

        So if you pay up all the taxes for all your trades and stop doing it all together, I assume you will only be liable for more taxes when the day comes that you sell the 0.5btc?

        reply

        • Chris Herbst

          15 January 2018 at 08:43 |
          Pleasure. That is correct.

          reply

  • Morne

    15 January 2018 at 08:39 |
    If you are showing too much gains, just purchase Golem or DistricOX and your gains will slowly start going away hence relieving you of your tax implications...

    reply

  • Peter

    16 January 2018 at 13:03 |
    There are plenty of gambling sites for cryptocurrencies what if you win your cryptocurrency and convert to ZAR is that taxable

    reply

    • Chris Herbst

      19 January 2018 at 14:29 |
      Hi Peter,
      In most cases money won from gambling is not taxable. In my opinion it would be the same for winning cryptocurrency when gambling. However, please note that if the gambling becomes a business activity itself then the proceeds will be taxable. You can see an explanation here: https://citizen.co.za/uncategorized/375292/tax-and-your-winnings/

      reply

  • vivek

    22 January 2018 at 04:04 |
    Hi Peter,
    I currently live and work in Japan and have been trading cryptocurrencies this last year and made a large amount of money.
    As a non-permanent resident of Japan I am tax exempt from capital gains as long as I do not cash out in yen. (bitcoin profits are considered capital gains here)
    Would I be able to cash out my crypto gains in Rands and declare the money tax free as a I am not a South African resident and pay income tax in Japan, before I send it back to Japan and rebuy my holdings?

    reply

    • Chris Herbst

      23 January 2018 at 07:31 |
      Hi Vivek,
      For your situation the double tax agreement between SA and Japan as well as other specific details of your situation should be considered.

      In order to assess your situation we will need comprehensive details. My best guess would be that if you have spend more than 183 days with a consecutive 60 day period in Japan in the last calendar year, it is likely that you would be considered a resident of Japan for tax purposes.

      Which means no matter where you realise the cryptocurrency to a currency you will be liable for tax in Japan.

      See double tax agreement between South Africa and Japan here: https://www.jetro.go.jp/ext_images/jfile/country/za/invest_04/pdfs/jpn-sa-convention.pdf

      For a comprehensive assessment of your situation you can contact us at info@chconsulting.co.za

      reply

      • Jean

        23 January 2018 at 16:35 |
        Hi Pieter,

        When you earn cryptocurrency through staking/holding of the cryptocurrency, what kind of tax is then applicable? For example,your initial cryptocurrency that you bought you keep and by keeping it you earn staking rewards or 'dividends' on it. Is this not considered as dividend tax?

        To me it seems similar to when you hold a share in this case a coin and earn a monthly or yearly dividend on it depending on the company rule.You get rewarded buy holding onto the cryptocurrency.Your rewards is based on the proffits that the cryptocurrency generate from its core business.

        Further more share dividends normally get paid in Fiat currency.

        Whereas when staking/holding Cryptocurrency X you get rewarded in a different cruptocurrency , Cryptocurrency Z.

        My guess would be you pay only dividend tax on the cryptocurrencies you earn from staking/holding.

        As soon as you keep the cryptocurrencies Z you earned from staking /holding and you do not immediately sell and convert it to fiat currency, the rewarded cryptocurrency will then also grow in value.When this happens capital gains tax might now also be applicable to the gains on cryptocurrency Z ?

        In the last scenario you pay dividend tax and later again capital gains tax?

        I would appreciate your input.

        Thanks

        reply

        • Chris Herbst

          29 January 2018 at 09:12 |
          Hi Jean,
          In my opinion your assessment of the situation is correct.

          When you earn the 'dividend' in cryptocurrency you will be liable for foreign dividend / interest income. The value that you will use is the ZAR value of the relevant cryptocurrency on the day you earned the foreign dividend / interest. This value is then the base cost for your capital gain that could arise in the future when you realise the relevant cryptocurrency.

          Let me know if this makes sense or if you would like an example with value?

          reply

          • Jean

            29 January 2018 at 09:47 |
            Hi Chris,

            Thank you for your feedback.

            Do you also consider rewards received from staking/holding of the cryptocurrency is taxable as foreign dividends or interest income then?

            Will there be a minimum staking/ holding period for it to be considered taxable as a dividend? Why I am asking this is because staking rewards/interest works for any period between 1 day or longer, tailored to the staker's specific needs.

            Is foreign dividend /interest income 20% right? I will appreciate it if you could show me an example with numbers for 100% clarity.

            Thanks again.

            reply

            • Chris Herbst

              03 February 2018 at 17:34 |
              Hi Jean,
              I have read up a bit now on staking. It seems to me like the reward you earn will simply be taxed as trading income and not interest or dividends. Staking reward seems very similar to me as normal mining rewards. Thus you will simply add the value (converted to local currency) when received to your taxable income and this will then be your base for future possible capital gains / losses.

              See the example with values I gave to James in an earlier comment above.

              Hope this helps.

              reply

  • Nic

    30 January 2018 at 05:10 |
    Hi Chris

    If I bought cryptocurrency in Korea while living here and paying tax here (been here longer than 183 days) if I withdraw it here should I declare it on my SA income tax return as income? And if so what proof would I provide for the buy/sell price. If I don't withdraw it and send it to the luno exchange-would SARS then tax me on the whole amount as they wouldn't have proof of how much I bought it for etc.

    Thanks for such an informative article!

    reply

    • Chris Herbst

      03 February 2018 at 17:39 |
      Hi Nic,
      It is a pleasure.
      It will be best to consult the double tax agreement between SA and Korea for 100% clarity on where that income should be taxed.

      Provided that it should be taxed in SA, yes you should declare it on your SA income tax return based on the ZAR value when you realised the gain. It becomes taxable when you realise it (convert from crypto to local currency or to another crypto currency), irrelevant of whether you transfer it to your bank account or an exchange such as Luno.

      The onus is on you to provide SARS with the values you bought and sold at, same as with other capital gain transactions. If SARS audit your tax return they can at that point determine the validity of what you declared and as for proof.

      Hope this helps you.

      reply

  • Ryan

    02 February 2018 at 08:22 |
    Hi Chris

    Nice article! Let's say you are trading, and for 2017-18 tax year you declare a profit and add that to your taxable income. Now in the 2018-19 tax year, you made losses. Do the losses also get added to taxable income, thereby reducing taxable income?

    Secondly, if you've declared all your trades as income, does this mean you would not need to pay CGT on them?

    Thanks!

    reply

    • Chris Herbst

      03 February 2018 at 17:42 |
      Hi Ryan,
      Thank you.
      Yes, if you are trading the gains will increase the relevant years taxable income and losses will decrease the taxable income (even if in different years as per your example).

      Correct, if you declare your gains as trading income you will not also pay CGT.

      Hope this helps you.

      reply

  • Christiaan

    22 February 2018 at 12:59 |
    Hi Chris

    Thanks for all the useful info, much appreciated.

    I've made good profits trading crypto during the current tax year that ends end of Feb 2018 - and it seems it would be considered income tax as I never held a single crypto currency for more than 6 months or so.

    Question - If I were to buy bitcoin again with proceeds (Rands) made from trading in current tax year, would this be deductible as trading expenses for this tax year as the net income in Rands would be less the amount re-invested?

    Thanks

    reply

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